Citi’s logic throws up more questions than answers

Agencies|

Nov 08, 2007, 03.12 AM IST

0Comments

COLORADO: Citigroup says it isn’t sure how much its subprime-related assets have fallen in value this quarter. Maybe it’s $8 billion. Maybe it’s $11 billion. On one point, though, Citigroup isn’t budging: It says none of these declines began until after last quarter ended.

The news from the nation’s biggest bank evokes memories of the scene from the 1984 hit comedy “Beverly Hills Cop” where Eddie Murphy’s character, detective Axel Foley, hands a valet the keys to his beat-up Chevy Nova at a pricey country club he’d never visited before. “Can you put this in a good spot? ‘Cause all of this $#@& happened the last time I parked here,” Foley said, straight-faced.

It’s as if we’re supposed to believe that all this stuff at Citigroup happened after September ended, notwithstanding the $8.4 billion of bad subprime mortgage stuff at Merrill Lynch that happened before September ended. And we’re also supposed to believe Citigroup’s brass didn’t have a clue any sooner.

In its November 4 press release, issued the same day Citigroup’s Charles Prince resigned as chief executive officer, the company said: “These declines in the fair value of Citi’s subprime related direct exposures followed a series of rating agency downgrades of subprime US mortgage related assets and other market developments, which occurred after the end of the third quarter.”

In other words: We did nothing wrong. There is no reason to question the $2.21 billion of net income Citigroup reported for the third quarter, down a mere 60% from a year earlier. (Citigroup also lowered its third-quarter earnings from the $2.38 billion it originally announced October 15.) Fairly presented in all material respects, the saying goes. As Citigroup’s chief financial officer, Gary Crittenden, said on Tuesday during a conference call with analysts, the declines were “driven by some events that have happened during the month of October”. To believe Citigroup, until the rating companies’ post-September 30 downgrades, the subprime holdings in its securities-and-banking business were still worth $55 billion, as reflected on the company’s latest balance sheet.

Perhaps it’s true. But Citigroup has given investors little evidence to believe it is. A Citigroup spokeswoman, Christina Pretto, declined to comment. Rather, the line that Citigroup has served up for investors is that it’s the rating companies’ doing. Forget the year-long wave of articles chronicling how far behind Moody’s Investors Service and Standard & Poor’s were in downgrading all the AAA-rated toxic waste that Citigroup and other banks gorged on during the subprime-mortgage binge.

Never mind that the downgrades came long after the values of so many of these collateralised-debt obligations and other Wall Street exotica had plunged. And put aside the publicity about all the government investigations that began last quarter — the ones probing the degree to which the rating firms were either out to lunch or too close to the companies that paid them to size up their deals. No, Citigroup’s faith in the rating companies’ abilities appears to have been so unshaken that it waited until Moody’s and S&P spoke before determining that its subprime holdings had tumbled by an additional $8 billion to $11 billion.